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When it comes to solving problems or taking advantage of promising opportunities, all too often too many confuse complex and complicated with innovation and creativity.

Do you remember the first time someone explained the “KISS” formula to you? For me, it was probably my first day as an insurance agent in 1965. A grizzled veteran (he was probably 35) sat me down and said, “Kid, I want you to know that the secret to success is the KISS.” Seeing my perplexed look, he leaned forward and said, “Keep it simple stupid.” It was a lesson I took to heart, but over the years I was struck by how often that concept was propagated and then totally ignored.

Even today, I never cease to be taken aback by the extent some business wonks will go to take something simple and make it complicated. The life insurance industry is certainly not alone in doing this, but it does set the gold standard when it comes to offering incredibly complex solutions for simple, straight-forward problems. In falling prey to the fallacy that complexity equates to creativity or innovation, the life insurance industry lost touch with the three attributes that were the basis for its past success – simplicity, safety and security. In so doing, the industry has put its success, profitability and even future viability at risk.

You don’t have to be in the life insurance business to learn from its missteps. By understanding the false assumptions, critical mistakes and shortsighted actions taken by the leaders of the life insurance industry, anyone in any industry, can learn that simple is better. Those responsible for the success of an organization can be more effective, efficient and successful when they recognize that byzantine solutions to simple, straightforward problems – such as those adopted by the life insurance industry – often only make the problem worse.

The 20th century was glory-time for the life insurance industry. By offering a simple solution to a vexing problem, the life insurance industry evolved from an obscure group of small companies catering to the elite into a ubiquitous highly-powerful industry meeting the needs of the masses. As the Industrial Revolution drew people from a self-sustaining life on farms to the cities and onto the payrolls of factories, the survival of families became dependent upon a salary earned by the husband, instead of crops raised by the family. Families soon recognized the risk to financial survival should the head of the family die and the cash stopped. For the first time in history, people became concerned about the economic cost of dying young; and during most of the 20th century people did die young.

The life insurance industry perceptively recognized the emerging opportunity and stepped up with a simple solution to the problem. They began to offer an easy to understand, affordable product that made the simple promise that the insurance company would be there to provide cash for the family if the breadwinner died. Using this unpretentious approach to a pressing consumer need, by the 1950’s life insurance was considered a necessity for any young family; so much so that even the government gave the product tax-favored status. And for their effort, life insurance companies became some of the largest and most profitable financial institutions in the world.

But times changed. By the latter stages of the 20th century longevity for men had been extended from 42 to 74 years. (Even longer for women!) Almost overnight consumers became less concerned with the cost of dying too soon and became focused on the cost of living too long. By the end of the 20th century, the pressing – even frightening – financial question changed from: Will I live as long as my family needs income? to “Will my income live as long as I do?

This new financial concern created an even greater opportunity for life insurance companies, because of all financial-type companies, life insurance companies were best structured solve this problem and benefit from the opportunity to do so. Unfortunately – happy with the past – the industry was late to recognize the change and was even more reluctant to respond to it. The life insurance industry paid a high premium for this recalcitrance to change; seeing its products move from the forefront of consumer needs to nothing more than an afterthought. The result was what might be expected: reduced sales, declining profits, consolidation and even failure within the industry.

When the honchos of the life insurance industry finally acknowledged the change in consumer needs and wants, they compounded their tardiness by ignoring the very strengths that initially built the industry – simplicity, safety and security. And even worse, they exacerbated the problem by attempting to replicate the products of banks and investment companies, rather than concentrating on the strengths and advantages of their own industry.

When it comes to an individual’s concern for financial security between the time of retirement and death, the vast majority of consumers have only two questions: Will the money I have be safe? Will the income my money produces last as long as I do? That’s it – nothing more – simple and sweet. All else is extraneous and of declining value that only serves to complicate and confuse the solution; while delaying action.

I know there are those who believe the primary motivating factor for the consumer is the level of income, not the safety or longevity of the income, but they are wrong! Striving for the maximum level of income as the basis for a sale, is only an excuse and invitation to make the solution more complex and complicated. (Just like investment products!) The race to provide the most income leads to layer upon layer of complexity and convoluted “benefits” that only serve to confuse and confound; literally losing sight of the simple problem to be solved.

As the life insurance industry has painfully learned, this mindset can lead to troublesome regulatory issues, suitability questions and expensive litigation, caused by products so complicated and complex that not even the salesperson can understand them, let alone the consumer. And it is all for naught, because the reality is that not all, but the vast majority of consumers would opt for lower income in exchange for the absolute certainty that their money is safe and the income will continue, no matter how long they live; as opposed to a little higher income, but with less certainty that their money is safe and that the income will live as long as they do. (People can adjust their standard of living to a guaranteed fixed income much easier than they can to one that is variable and uncertain.)

In doing research for this blog, I looked at “product sheets” for two companies selling income products. One company offered 37 different variations of product, while the second company topped its competitor by offering 47 different products; all intended to meet one simple problem. That’s two companies – out of a very large industry – offering 83 different types of income products; just imagine how many there are in total!

Why is it that companies would respond to such a simple need, with so much complexity and befuddling products? Well, believe it or not, one answer is – because they can. Lacking an understanding of the true creativity of simplicity, insurance companies have defined innovation and ingenuity as the number of “new products” that can be put on the street. Another problem is that often insurance executives (most whom have never been face to face with a consumer) believe that the best strategy to increase sales is to be all things to all people. This philosophy requires products that target even the smallest sliver of the market, rather than the largest segment of the market. This approach leads to increasing complexity and confusion, both among consumers and salespeople charged with selling the products.

In fairness to the companies, insurance agents are also at the root of this complexity. Agents tend to believe that if the company will give them “just one more new product,” their sales will significantly increase. This belief is born out of the idea (hope) that a product can sell itself, but that never happens. The value of the agent is to sell the product, not take orders. The more products there are to offer and the increased complexity that comes along with them means the agents spend more time explaining (often what they don’t understand themselves) and less time selling.

Insurance companies and their agents will do better and their future will be brighter if they get back to the same formula that sparked industry success 100 years ago – KISS! The insurance industry should remember its name – insurance – and develop income products based on simplicity, safety and security. The insurance companies should take advantage of the fact that they are the only institutions that can provide a simple solution to financial needs, guarantee the safety of capital and offer the security of providing an income that cannot be outlived.

Sure, these products would not be flashy and sexy, but they would be simple, easy to understand and meet the needs of most consumers to protect their money and security in retirement. Remember, life insurance was never a sexy product, but people bought it in droves because it met their needs for safety and security. The life insurance industry enjoyed its greatest growth and prosperity when its products were simple, easy to understand and based on the inherent value of meeting a financial need and they can again if they just remember KISS.

To survive – not to mention prosper – the life insurance industry must go back to the future

The life insurance industryhas been called a lot of things, but one thing it has not been called recently is “a growth industry.” It has not always been that way. There was a time, not so long ago, when the life insurance industry was a growing, vibrant, influential player, not just in financial services, but in the whole of American economic life.

Unfortunately this is no longer the case. It may be a painful truth to admit, but until it is acknowledged, the industry’s inexorable decline will continue because there will be no urgency to reverse the trend.

There are those who will dispute this conclusion that the life insurance industry is in decline and base their argument on a litany of increasing sales figures. But a closer examination will reveal that large portions of these “sales” are nothing more than a regurgitation of assets already under industry management. If the “sales” that are the result of simply shifting assets from one company to another were deducted from the total, it would offer a more accurate, but not very pretty picture of real sales.

This is not growth – it is financial cannibalization. Like a modern-day Donner Party, lost, trapped and desperate, the life insurance companies have turned to eating each other in an effort to survive. Some may make it, but this is certainly not a path to healthy industry growth.

Your Whole Life is Still a Mistake

Product is another problem. The sales of individual life insurance – once the bellwether of growth for the industry – are, at best, lackluster. More and more the only type of life insurance that sells is cheap term insurance. Yet life insurance companies continue to dress-up and prop-up whole life insurance in much the same way Norman Bates did his dead mother in the movie Psycho, pretending it is still alive.

Get over it. Whole life insurance may have worked well in the last century, but only because people died young and there were few financial options available for most people. (It also sold well because the insurance industry had invested in and created a highly-trained, dedicated distribution system of agents who had been taught how to use fear as a motivator for sales.)

The once-vaunted distribution structure of the insurance industry lies in shambles today—a victim of indifference, disinterest and neglect as the companies ceased to invest in the system. In turn, this has sent most companies on a frantic scavenger hunt, grasping for any and all sources of business, while failing to offer the least bit of commitment or loyalty to any of them. When it comes to its distribution system, the life insurance industry is like the farmer who constantly tills the soil reaping all he can, but never replenishes the nutrients and then wonders why the harvest gets smaller and smaller. As a result of the insurance industry’s failure to invest in distribution for the future, today it relies on renting rather than owning the distribution system and that can be a precursor for a very uncertain future.

Bad, but not the Least of the Problems for the Industry

This ambivalence toward investing for the future and the resultant lack of growth potential makes it all but impossible for the insurance industry to attract talented individuals. No longer is a career in life insurance – especially in sales – considered a viable option for all but failed bankers. There was a time when life insurance ofered an attractive career. Insurance companies actively and successfully recruited for “career agents” on college campuses, but no longer. The inability to attract talented “new blood” into the industry means that the sale of life insurance products that were once the primary focus of a well-trained force of agents has become a part-time pastime for some or simply an adjunct for those selling other financial products.

The Writing is on the Wall

The signs of decline in the industry are painfully evident. The river of organically created capital that once allowed companies to float new business and invest in the future of the company has virtually gone dry. Companies, starved for capital, have either withdrawn from the market or have prostrated themselves before the “money merchants” of Wall Street who are tromping through the industry landscape, picking at the bones of the dead and shooting the wounded. For the most part, these financial companies – none of whom are insurance organizations – swooping in to buy weakened insurance companies are doing so to bleed them dry for short-term gains, not to invest in the long-term development and future of these companies. This activity does nothing but reduce the capacity for the insurance industry as a whole to grow, further dimming the future.

Admittedly, it is difficult to focus on investing for the future while slouching at your desk bleeding to death, but doing just that is the only real option for survival. The sad irony is that the lack of industry growth is not for want of opportunity, but from a failure to invest in the future of the opportunity. For almost a century the life insurance was a “growth industry,” and as such it was able to chalk up remarkable levels of sustained growth; all because it continued to invest in the future.

Much of that investment was in the distribution system that became the fuel for industry growth. But once the industry came to view building for the future as a cost rather than an investment, the path turned to decline. Soon the objective for companies became trying to survive today, rather than seeking growth for tomorrow. The life insurance industry has the opportunity to once again come to be seen as a growth industry, but not until or unless it gets back to doing with it did so well, and that is investing in its future.

Investing For Future Growth

If the life insurance industry wants to invest in the future to become a growth industry again, a good start would be to focus on two simple efforts:

Decide to beat the competition, not join them.

Use technology to create new career opportunities in life insurance that will attract new talent.

The life insurance industry has been feeding off the assets of its own companies, when it should have been raiding the assets of banks and investment companies. Banks and investment firms should be viewed as enemies, not partners. Life insurance companies have tried to cozy up and be buddy-buddy with banks and investment firms because – lacking their own effective distribution system – they need to rent the distribution system of these competitors. How stupid is that? Would you partner up with a partner who has no interest in your interest? Would you partner with a partner whose only interest was to use you to further their interest? Only the desperate would answer those questions in the affirmative.

The life insurance industry did remarkably well playing to consumer’s fears of economic calamity if they died young. They can now use the consumer’s fear of not having enough money if they live to sell products that meet that need. There is an old – but still valid – saw in the life insurance industry: Consumers are more concerned with the return of their money than they are with the return on their money. In today’s world could be added: Consumers are more concerned with a guarantee of income, than with what that income will be. The life insurance industry should play to this fear and develop products designed to raid the assets of banks and investment firms. The attitude should be, “They are the enemy (blank) ‘em!

Rather than using technology to circumvent the agent distribution system, the life insurance industry should use it to invigorate the system. There are all sorts of technology available to the insurance industry that could be used to create an attractive, profitable, long-term career in life insurance selling. Systems can be developed that could attract new blood to the industry and start a whole new growth wave. Technology can be used to prospect and qualify leads, make a presentation and educate – not just about product – but actually teach sales skills. The only drawback to adopting this technology is that it requires an investment today for a return in the future. That is something the life insurance industry was willing to do for over a century – and it did it well. But investing for growth in the future is not something the life insurance industry is willing to do today, so it may not have a future.

And the Moral of the Story …

There are parallels between the oil and life insurance industry. The oil industry must make a big investment upfront in order to have future growth and profit. Land has to be leased, test-wells drilled and then the purchase of heavy equipment to extract the oil once discovered; all require heavy investment. Once the oil begins to flow, so too do the profits for the oil company, but unless the oil company continues to invest in finding future oil, its old wells will eventually peter out and so will the company.

The life insurance industry also must make a big investment upfront in order to have future growth and profit. There is the need to invest in products that meet modern needs and compete directly against the products of banks and investment firms. It is expensive to invest in a distribution system that will extract the sales that will turn into growth and profit. The life insurance industry has made these investments in the past and benefited mightily. But that investment has slowed to a trickle and like the oil company that fails to invest in new sources of oil, the future for the life insurance industry may also peter out.

Are Longevity Insurance Policies a Smart Buy? Maybe Someday, But Not Now

It used to be that our grandparents worried about what would happen to their kids if they died too soon. Nowadays, our kids worry about what will happen to them, if we live too long.

Extended longevity is both a blessing and a curse. The blessings are well known and innumerable. But we are also cursed with extra time to fear death and more time to worry about our added longevity stripping us of the cash required to comfortably support those “bonus” years. In short, most folks are now more concerned about the cost of living too long, than they are about the cost of dying too soon.

A New Opportunity is Waiting

The life insurance industry achieved exceptional success and became comfortable offering products that protected against the cost of dying too soon. But it has taken the industry several decades and a number of fits and failures to (grudgingly) recognize and accept this fundamental change in consumer needs.

Despite the admonitions of some within the industry, the idea of accepting – even acknowledging – change has not been easy for the life insurance industry. Historically accustomed as it was to selling the products it wanted to sell versus products the consumer sought to buy, the life insurance industry’s initial response to the threats posed by this change was a call to “get back to the basics.” The problem for the life insurance industry was that the basics had changed and clinging to the past simply exacerbated the problems.

The Writing on the Wall was not in Invisible Ink

It’s not like the life insurance industry was not warned. As long as three decades ago, the signs of change – for those who were open to seeing them – were clearly evident. Life expectancy at the start of the 20th century was a mere 42 years; by the end of the century it had dramatically increased to age 74; with predictions that it would soon extend well into the 80s.

These remarkable statistics and a number of other factors signaled the need for change, but it was this extension of longevity that led the consumer to conclude that the fundamental products offered by the life insurance industry had become outmoded.

The life insurance industry has finally been dragged kicking and screaming into the future, but because of its intransigent allegiance to the past, it may be too late to recover what it has lost. Now that the life insurance industry has accepted the premise that it must change – if it is to survive – and offer products that protect against the cost of longevity, it is struggling with just how to do so.

Many believe that the business of insurance companies is to take risks, but that is not the case. (At least that’s not the approach for those companies that survive.) The path to success in the insurance industry is not to assume the risk of loss, but to manage the risk of loss faced by others. In order to do this, the insurance company must fully understand all aspects of the risk, so it can be managed.

The life insurance industry has more than 150 years of experience designing products that cover the costs of dying. This experience enables the industry to comfortably manage the risk of dying, without assuming much risk. Given any group of insureds, the life insurance industry can forecast – with virtual prescient certainty – when and how many in that group will die during any given period of time.

On the other hand, the life insurance industry has only a smidgeon of experience understanding the risks inherent in what could be called the “longevity market”: offering income products that meet the costs of living. An insurance company can use life expectancy tables to determine when people will die, but it has no experience projecting how many individuals in a group will live beyond – and for how long – the moving target of life expectancy.

This means the insurance company is, in effect, making a guess (taking a risk) as to how many insureds will live longer than expected and what the duration of those claims – life income – will be. In addition, interest rates have a dramatic effect on the amount and cost of income benefits. And since interest rates, another moving target, cannot be predicted for even the next year, it is a significant risk for insurance companies to try to project interest rates over decades.

The Unwelcome Upshot of All This

Faced with this dual conundrum, the prudent insurance company will tend to develop products for the “longevity market” that are loaded with hedges, protections and benefits for the company, but not so many for the consumer. This is to be expected, because insurance companies do not (and should not) assume risks they don’t understand or can’t manage. As a result, the tactic taken by insurance companies in the design of these first-generation longevity products is to transfer as much risk as possible to the insured. And this will continue to be the approach until the industry gains experience and confidence in the management of those risks. In the meantime, it’s buyer beware.

The concept and objective of these longevity policies is fine, but they are so loaded with protections for the insurance company, they don’t yet offer good value for the consumer and should be avoided. It’s not that these products are bad, it’s that they are not as good as they could or will be and the cost benefit for the consumer is not well balanced.

These products are the insurance industry’s first response to meet the concerns an individual may have that they will “outlive” their assets and income. They may have enough money to get to age 75, but what if they live to 95? The basic structure of “longevity insurance” is for the purchaser to deposit a lump-sum amount with the insurance company, with the understanding that no benefits will be paid unless and until a person lives to a predetermined age. For example, a 55-year-old deposits $50,000 with the insurance company to buy a longevity policy. The policy would pay no benefits whatsoever until age 85. At that time, the company would begin to pay about $50,000 a year, for as long as the insured lived.

This type of policy certainly solves the “longevity problem,” but it comes at a very high price with few options for the insured. For one thing, once the deposit is paid to the insurance company, it belongs to the insurance company and may never be returned. The insured gives up all control and access to the money and if they change their mind or have an emergency need for cash, they are out of luck.

That means an individual age 55 could deposit $50,000 or more with an insurance company and if they don’t live to age 85, they lose all the money deposited. The only chance they have to get their money back is to live. Even then, if the insured does live to 85, and dies a year or two later, the funds are lost. In fact, insurance companies anticipate that so many of those who buy the policy will not live to collect any benefits they count on using these forfeited funds to pay those who do live. (In fairness, some companies do offer the insured options that would, under certain circumstances, allow for a return of this premium, but the costs are so prohibitive they virtually eliminate the basic value of these policies.)

There are other problems with the policy as well. For one thing, benefits are set and guaranteed at the time the policy is purchased. With current interest rates at such low levels, this may be the worst time to buy a policy that locks in current rates for, what could be, 30 years or more. Any increase in investment rates between now and when benefit payments commence (if they ever do) would benefit the company, not the policyholder. Another concern for the policyholder could be inflation. A guarantee of $50,000 a year income may seem good today, but what will its value in purchasing power be in 30 years?

There is another issue a potential purchaser of these longevity policies should consider. It is what investors call the “credit risk.” When buyers deposit their funds with the insurance company, they are taking the credit risk that the company will be around in 30 years and will be able to meet its obligations. This is a relatively low risk decision, but if the insurance company mismanages the investments backing these policies, if more people live than anticipated live to receive benefits and those receiving income live longer than planned, the insurance company could be squeezed to meet its promises.

So what is someone who is concerned about the economic costs of living too long to do?

Well truth be told, these “longevity insurance” policies are not all that revolutionary and are not worth the cost or the risk the insured must assume in order to receive benefits. In effect, the core of these policies is a single premium deferred annuity. In a single premium deferred annuity the insured makes a single deposit of funds, allows those funds to accumulate over time and then, at a later date, can elect to receive an income for as long as they live. The risk the insured is taking by purchasing this type of policy is that it is impossible to know exactly what the income will be when they elect to receive it.

What makes the longevity policy unique is that the insurance company will guarantee what that income will be. That’s great. But the costs applied by the insurance company to receive this benefit are just not worth it. The insured must give up the right to get their funds refunded if their needs change. If they need cash for unexpected purchases or emergencies, they must find it elsewhere. If they die before receiving any benefits, their family receives nothing. They have only one chance to receive income and that is they must hang on until they reach 85 and if they die a month before or a month after income starts, that’s the end of the income stream. All these costs and limitations outweigh the value of the insurance company’s guarantee as to what the income will be at age 85.

In the Meantime, Here’s the Smart Choice

Until the insurance companies gain the experience and desire to develop improved iterations of longevity insurance, the consumer is better served by purchasing a traditional single premium deferred annuity. This keeps all the options on the side of the consumer, while still offering a guaranteed income to cover the cost of longevity. The only risk for the consumer has is not knowing exactly what that income will be when they elect it, but that risk is slight and is a fair exchange for the high costs of current longevity insurance policies. This is the best way, at least for now, to enjoy your longevity, for as long as it lasts.

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If history has taught us anything it is this: Progress or perish. Make history or you are history. Gone. Maybe even forgotten.
This was true of the great empires. They all learned, for better or sometimes worse, that individuals and institutions can make prodigious contributions to history by shaping the future, but when they failed to continue to make history, they became history: We know them now for what they did, not what they are doing.

ABOUT BOB MacDONALD

Founder of LifeUSA Insurance and retired CEO of Allianz Life, N.A., Bob MacDonald regularly blogs with timely, hard-hitting comments on almost every business subject from entrepreneurism to better management, smart business leadership, government and politics, and of course, the life insurance industry.

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Bob MacDonald, founder of LifeUSA Insurance and retired CEO of Allianz Life, N.A., regularly blogs with timely, hard-hitting comments on almost every business subject from entrepreneurism to better
management, smart business leadership, government and politics, and of course, the life insurance industry.